Australian retailer Coles outlines sale plans

SusanMurdoch

MELBOURNE (MarketWatch) -- Australia's second-largest retailer Coles Group (CGJ.AU) Monday outlined plans for a potential breakup of the company under a A$19 billion-plus auction.

Coles, which put itself up for sale last month, will consider selling its three businesses separately to lure a wider range of bidders and maximize competitive tension against the powerful Kohlberg Kravis Roberts & Co.-led syndicate that is circling the group.

Confirmation Coles could be carved up, drove the stock to a record high A$16.28. The shares closed at A$16.15, up 0.9%, valuing the company at A$19.3 billion. The auction details overshadowed the group's first-half results which pointed to further market share losses at its core supermarkets operations.

The retailer announced the auction after slashing its profit forecast for fiscal 2008 by 10% last month. The decision came just five months after the board knocked back a A$15.25-a-share offer from the KKR-led group.

Chairman Rick Allert again refused to give details on the number of interested parties Monday but reiterated A$15.25 a share "still substantially undervalued" the group.

"We stick by that, but I'm not going to give a ball-by-ball description of consortiums, price and what happens daily," Allert told analysts at a briefing.

Allert said Coles will consider bids for the entire company, the supermarkets division, discount department store chain Target and stationery unit Officeworks. It could also sell a significant stake in its supermarkets operations and remain listed.

But in apparent concession to the KKR-led group, Coles dropped mooted plans to limit consortium members to four, which would've set it on collision course with the six-strong KKR syndicate.

"It's a concern they've taken a step back on the number of members they will allow in a bidding consortium," BT Financial analyst Sondal Bensan said. "It just highlights that maybe the board doesn't have the upper-hand in the sale process."

Coles will allow a maximum of six parties in a syndicate and will restrict the number of banks financing a bid to three. The rules aim to prevent a "bear hug" situation when buyout firms band together late in the sale process or monopolize financing.

Allert said the sale process could take up to six months.

Merrill Lynch has estimated Target could fetch A$3.5 billion and Officeworks around A$1.1 billion. Coles' food and liquor business could be worth up to A$15 billion to private equity, it said in a report last month.

Analysts expect in addition to other private-equity groups, local retailers such as Harvey Norman Ltd., Woolworths Ltd. along with international retailers like Tesco PLC of the U.K., could be take part in the auction.

Coles reported a 3.5% increase in net profit for the first-half to A$501.3 million from A$484.5 million a year ago. Like-for-like sales at its core food and liquor division rose 2.9%, well below Woolworths' first-half sales growth of 5.7%.

Chief Executive John Fletcher said same-store sales had continued to decline into the third quarter.

"Another way to say it is, it's going to get tougher before it gets better," Fletcher said at the briefing.

The weak result was partly blamed on a decision to mothball its discount supermarket chain Bi-Lo and rebadge the stores under the Coles banner, a move which has driven some budget conscious customers to its rivals. Fletcher said it has halted plans to convert the remaining 73 Bi-Lo stores.

Coles reiterated guidance of a flat net profit for the current financial year of around A$787 million, with earnings expected to rise 20% in fiscal 2008.

KKR's bidding consortium includes Carlyle Group, CVC Asia Pacific, TPG, formerly Texas Pacific Group, and Blackstone Group, expanding this month to include Bain Capital, one of the original syndicate members from last year.

TPG was last year part of the A$1.4 billion purchase of the Myer department store chain from Coles. Myer will unveil its interim results under a its new private equity owners Tuesday.

"It will be interesting to see tomorrow, with Myer, how well a Coles business goes in other people's hands," Paul Xiradis, director of equities at funds manager Ausbil Dexia said. "If those figures come out to be strong, it could actually provide a bit more price tension for the other businesses."

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